Why forcing Wal-Mart to raise the minimum wage is a bad idea

The Washington, D.C. city council recently approved legislation that would increase the city’s minimum wage for employees at larger retailers like Walmart and Target to $12.50 an hour, a nearly 50% increase over the current minimum of $8.25 that applies to all employers. The legislation was introduced specifically to target Walmart, but local politics forced its sponsors to broaden it to include other large retailers. And, notably, unionized stores like Safeway are excluded from the ordinance. Whether Mayor Vincent Gray signs the bill is still up in the air as this blog post is being written. Walmart openly opposed the legislation and threatened to stop current plans to build three new stores in the District if the legislation was approved. Council passed it anyway.

Several issues crop up watching the city council wrestle with this issue and are worth a few comments.

First, perhaps it’s a sign of the times that elected officials believe prices don’t matter in labor or land markets. As one councilmen said: “We’re at a point where we don’t need retailers. Retailers need us.” That’s an odd statement because the very places Walmart is investing in the District are neighborhoods that are underserved by retail. At least one of the locations is in a neighborhood in Southeast DC that has no large scale retail, and local residents travel across the border to Maryland to meet their needs. In the case of DC’s so-called living wage bill, large employers, particularly retailers, can’t ignore their labor costs when they are making investment decisions.

Walmart is notorious for keeping prices low by squeezing suppliers to provide product on razer thin margins. They aren’t going to change their business model because the DC city council decided that, for public policy reason, they preferred a retail business using a high wage, high cost, lower employment model rather than the one Walmart pioneered to become the world’s largest retailer.

Moreover, retail jobs are unskilled jobs, and a higher minimum wage on the scale approved by the council will simply push their compensation beyond their value in the market place. In short, jobs won’t be created where the value produced is lower than the compensation paid. In fact, eight out of ten economists agree that, as an empirical matter, higher minimum wages reduce employment for young, unskilled and less educated workers even in economic environments where overall job growth might not fall. Those economists that agree with raising the minimum wage believe that higher unemployment for young, unskilled, and often minority workers is an acceptable trade off for the higher wages that go to those that remain employed. In short, they believe the higher minimum wage is important for income redistribution reasons, not retail market (or job market) efficiency reasons. Thinking that Walmart (and other big retailers) will ignore these costs, when lower cost alternatives exist in Virginia and Maryland, is simply unrealistic,

Second, a substantial part of the discussion seemed to hinge on whether or not Walmart would create jobs. Many on the left (and supporters of the higher minimum wage) argue that Walmart, on net, does not increase local employment overall and may reduce local retail employment. The argument is that Walmart displaces local retailers rather than complimenting existing companies and businesses. Even if this argument is true (which I doubt), the addition of a Walmart increases the retail opportunities available to local residents, so it’s a net win. This is true simply because if Walmart did not provide a competitive retail experience the location would close up shop. Like any business, Walmart does not exist to create jobs. It exists to provide goods and services to consumers. Jobs (labor) is an input into the production process, not an output.

The second point leads to a third observation: Washington, DC is shooting itself in the foot on economic development policy. The city is notoriously difficult to work with. It’s an an expensive city, both in terms of land and development costs as well as tax and regulatory compliance costs. Walmart has already invested millions of dollars in site plan development and approvals. With the city now actively managing wage rates for employers–notably this is an ordinance that targeted specific businesses–the district is signalling that they will be active meddlers in how businesses operate. This will likely discourage new investment by any large, highe profile businesses, retail and non-retail.

In the end, most cities, particularly large central cities, are best figuring out ways to lower costs for businesses interested in investing in their communities, not increasing them. The DC council’s Living Wage legislation does little more than raise costs and does not bode well for future retail development in the cities low income neighborhoods that are also the hardest to serve.